Jan. 7, 2013
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A foreclosure sign blows in the wind in front of a home in Antioch, Calif. / Paul Sakuma, AP

by Kevin McCoy, USA TODAY

by Kevin McCoy, USA TODAY

Ten major U.S. banks and mortgage companies will pay $8.5 billion to settle complaints that they improperly foreclosed on some homeowners, federal regulators announced Monday.

The settlement package includes $3.3 billion in direct payments to eligible owners and $5.2 billion in loan modifications, forgiveness of deficiency judgments and other assistance, according to announcements by the Federal Reserve and the Office of the Comptroller of the Currency (OCC).

The OCC says the direct payments will be the highest compensation to homeowners so far as a result of lenders' actions during the foreclosure crisis.

Eligible homeowners who should have been allowed to stay in their homes will receive compensation ranging from hundreds of dollars to as high as $125,000, depending on the type of possible mortgage servicing error.

More than 3.8 million borrowers whose home loans at these 10 banks were foreclosed on in 2009 and 2010 will receive some compensation in a timely manner, regulators said.

A payment agent will be appointed to administer payments. The agent is expected to contact eligible borrowers by the end of March with payment details, regulators said. Borrowers will not have to take any further action.

The settlement includes Bank of America, Citigroup, Wells Fargo, JPMorgan Chase, MetLife Bank, PNC, Sovereign, Sun Trust, U.S. Bank and Aurora. The financial firms have operated under what is known as enforcement actions since April 2011. Federal regulators ordered the enforcement actions after they found evidence the banks mishandled paperwork or improperly sped up foreclosures by bypassing required procedures.

To determine compensation amounts, the 10 banks will assign each borrower to one of 11 categories of potential harm, with the highest being active duty service members who were improperly foreclosed upon. Regulators will spot-check their decisions.

Compensation levels for each of the categories are now being set by regulators.

Every borrower will receive the same compensation as every other borrower in that category, whether or not they were actually harmed, the OCC said.

Almost 500,000 borrowers had requested independent foreclosure reviews of their cases under a previous settlement agreement between the banks and regulators. They will get a little more than people who did not request reviews, according to the OCC. The broader and faster repayment framework announced Monday will replace those reviews.

Four other banks - HSBC, Ally, EverBank and One West - are still in negotiations, according to the OCC.

Comptroller of the Currency Thomas Curry acknowledged in a statement Monday that the settlement represents a shift in the regulators' original enforcement strategy. But he said "it has become clear that carrying the process through to its conclusion would divert money away from the impacted homeowners and also needlessly delay the dispensation of compensation to affected borrowers."

"Our new course of action will get more money to more people more quickly, and it will speed recovery in the nation's housing markets," added Curry.

Although "any movement toward more compensation for homeowners is a step in the right direction," this agreement is "flawed," says Alys Cohen, a staff attorney for the National Consumer Law Center.

The size of the settlement "is wholly inadequate in light of the scale of the harm," she added. "If the (independent foreclosure) reviews had been done right the first time, banks would have been on the hook to pay far more to homeowners."